Trichet speaks of exit strategy, Geithner of additional capital

The Financial Times is quite packed today with op-eds from ECB President Jean Claude Trichet and US Treasury Secretary Tim Geithner. Ahead of the G20 summit in London and being less than a fortnight away from Lehman Brothers’ “death” anniversary, what we’re seeing here are two leaders who each spoke of different, albeit relevant matters that aim towards a better financial system.

Trichet announces that an exit strategy has been devised for the Euro area while keeping in mind four issues that will shape how they implement their strategies. First of them surrounds possible risks that the non-standard measures might trigger. He said the central bank would be quick to act on them to ensure “solid anchoring of inflation expectations”. Second, he mentioned the “automatic” phasing out of some of the strategies given their design. Third, the president expressed confidence that the ECB has the operational framework to work on the unwinding of the non-traditional measures. The last issue concerned purchases of securities, about which he said:

We opted for a purchase programme with a volume that was significant enough to improve the activity and functioning of the market, but not so large as to dominate the market or the balance sheets of eurozone central banks.

He later on continued:

The ECB has an exit strategy from its non-standard measures in place. Its implementation will build on three self-reinforcing elements: credibility, alertness and steady-handedness. These form the basis for the strong anchoring of inflation expectations in the euro area – our main asset.

Meanwhile, Tim Geithner has another concern. Believing that banks lacked the capital reserve they kept, he is pushing that these same institutions build their capital and increasetheir buffers in order to not only absorb future losses that might come their way but more importantly maintain the stability in the system. He laid out a 5-point plan to accomplish the stability and solvency he spoke of. First relates to higher capital requirements, while the second revolved around higher forms of capital citing higher Tier 1 as a prime example. He then suggests more forward-looking accounting rules and capital requirements as well as subjecting banks to liquidity standards that improves their resilience if panic happens again. Perhaps the most important is his last:

Finally, we need to improve the rules used to measure risks embedded in banks’ portfolios and the capital required to protect against them, and put greater constraints on banks’ use of leverage to dampen volatility.

The keywords: improved rules to measure risk and constrained leverage (sooner or later they would just have to learn).